Thursday, July 16, 2009

Recession is Over, Let the Jobless Recovery Begin!

In this season of doubt, I'm prepared to declare that the recession is really, most probably over.Why? Well, it's not because the economists surveyed by the Wall Street Journal believe it'll end in this quarter. (These guys wouldn't know an economic inflection point if it hit them upside the head. All through 2008, when the economy was contracting, they projected growth for the year.) No, two of the best and most objective forecasters, who are not connected to investment banks or to the CNBC noise machine, have recently called the upturn. Macroeconomic Advisers, the St. Louis-based consulting firm that compiles a monthly GDP index, reported to its clients Monday that while second-quarter GDP was tracking at negative 0.1 percent (recession), the third quarter was tracking at 2.4% growth.

The folks at the Economic Cycles Research Institute agree enthusiastically. It's not because they've detected green pea shoots in Central Park. Rather, it's because we've seen the three P's, says Lakshman Achuthan, managing director at ECRI, which has been studying business cycles for decades and was one of the few outfits to call the last two recessions with any degree of accuracy.~Daniel Gross in Newsweek

8 Comments:

Back on June 18, 2009 you were dancing about a net 71 point increase. Yet the Philly Fed index turns downward in today's report and you say....absolutely nothing about it. This "leading indicator" you're so proud of seems to have fallen off the face of the Earth just like the University of Michigan Consumer Sentiment Survey magically disappeared off your radar the moment it turned South.

The Philly Fed report was generally negative for current and future conditions, but the index of manufacturing executives opinions show some optimism over the next six months (as if their cheerleading for recovery means a damned thing):

Indexes for general activity, new orders, and shipments all registered negative readingsthis month, although the indexes’ levels remained above their average readings for the year. Firms also report continued declines in employment and work hours this month. Most of the survey’s broad indicators of futureactivity declined slightly this month, but they continue to suggest that the region’s manufacturing executives expect a recovery in business over the next six months.\

The best news you can point to in any of these surveys, indices, or statistics is that "awful" is improving to "bad." If you believe so strongly in all these indices, how about letting us know when they tell a different story? How about a little intellectual honesty, Doc?

The arguments marshaled by standard bearers of the pessimistic consensus hold little water. Usually, their “analysis” is based on gut feel, bolstered by any seemingly plausible argument that would support their case.

For instance, last month, with oil prices and interest rates staging somewhat of an advance from their lows, skeptics opined that this would nip any potential recovery in the bud. But it is hardly unusual for such indicators to turn up in anticipation of economic revivals, which would never take place if higher oil prices or interest rates were able to head them off.

This month, the rise in the jobless rate to a 25-year high is being taken by some as an argument against recovery because supposedly, consumers will not spend when joblessness is mounting. Apparently, they are unaware that even the 1929-33 recession ended when the jobless rate was over 25% – and still rising!

The “second-derivative rally” in equities has provoked much derision, especially from those who missed it. As we reported last month, “ECRI’s leading indexes now have positive second derivatives. But, more importantly, they have already had positive first derivatives for some months. It is worth reminding calculus-challenged analysts who doubt the significance of these cyclical upswings of the second derivative test: when the first derivative of a univariate function rises to zero and its second derivative turns positive, it marks the low point of the function. That development is already in the rear-view mirror for every one of ECRI’s leading indexes of economic activity.”

In fact, “what is impressive here is the degree of unanimity within and across ECRI’s leading indexes, along with the classic sequence of advances in those indexes. Such a combination of upturns – a resounding confirmation of our April forecast that the recession will end this summer – does not happen unless an end to the recession is imminent.

In sum, the economy has a raft of problems that will take a long time to resolve. But none of them can head off the imminent economic recovery that ECRI’s objective leading indexes are promising today.”

The modest pullback in stock prices that followed the springtime rally, along with a worse-than-expected June jobs report, allowed the skeptics to re-emerge, asserting that without actual improvement in hard economic data, the “green shoots” had wilted away. What they do not realize, as we reasserted in ECRI’s June U.S. Cyclical Outlook report to Professional Members, “is that the cyclical improvement in the economy is proceeding in a textbook sequence, from long leading indicators to short leading indicators to coincident indicators.” In fact, “there are now pronounced, pervasive and persistent upturns in a succession of leading indexes of economic revival.”

Talk about your intellectual dishonesty! An index climbs 71 points from December to June and a 5 point pullback in July means it's "fallen off the face of the Earth"?!?

I did not say the index has "fallen off the face of the Earth." I said that the Index has fallen off the face of the Earth in your reporting because it runs contrary to the story you are pedaling every day.

If that very same index had gone up by five points, you would have posted the results first thing this morning and danced a jig about an uninterrupted 76 point increase.

I don't buy the predictive power of this survey at all! The survey asks business executives what they are doing and what they believe will happen in the next 6 months. It's 100% BS. I'm much more persuaded by what firms actually do than what they say they are going to do or what they believe will happen.

The four-week moving average of initial unemployment claims has fallen 3.8% and you're declaring the recession over thereby!

What oh what will you say if initial claims start rising again? The correct answer, as predicted by the Miller Index of Panglossian Bloggers is that you will say absolutely nothing about it.

I am perfectly willing to accept falling initial unemployment claims as a hopeful sign. I'm willing to accept rising sales and prices as a sign of market recovery. Unlike you, I put things in their proper perspectives and examine the fundamentals behind the movements.

In the California housing market, for example, there are non-trivial monetary incentives from the government which include tax credits and subsidized mortgages with 96.5% leverage. You also have a huge delay in foreclosure sales instituted by state legislation. Sales are up at bargain-basement prices on shanty-town homes. In no way, shape, or form is the data indicative of an unambiguous improvement in market conditions.

The arguments marshaled by standard bearers of the pessimistic consensus hold little water. Usually, their “analysis” is based on gut feel,

You have got to be kidding me. Almost all of the surveys you are dancing about are from the "gut feelings" of lending officers, CEOs, and market participants, all with a vested financial interest in an overly optimistic projection.

I look at actual data, slightly lagged due to data gathering limitations, and properly adjusted for seasonal variations. I report what is actually going on now and make modest predictions of the future based on sound economic theory.

You, on the other hand, look at tick data. You look at chicken bones tossed into a tin pan, planets in constellations, and psychic readings to relentlessly forecast a clear and rosy outlook for the future. You have never once admitted any setbacks or even reason for caution in any interpretation of your favorite reports. All it takes is a cursory reading of these reports to find them filled with qualified opinions, caveats, and reasons for concern.

It would be intellectually honest if you declared your faith in these indices and honestly reported the setbacks as well as the gains.

I can't wait until they start taking cheap shots at the Manufacturing Belt states. Easy to pin it on an easy scapegoat, and then they can say it's a recovery in all but a few "stubbornly dissenting" states.